The Government's role is not to finance business. That is one of the principles of European Union regulations - breaching it is considered state aid and is penalised. But should the Government decide to pour some money into the economy, that can happen through banks. Whether it will go to the right people is impossible to predict.

This is why the decision by the Bulgarian Cabinet to support small and medium business is being carried out through a fairly complex scheme. The Government will raise the equity of the Bulgarian Development Bank (BDB), the former Encouragement Bank, with 100 million leva before the year's end, which will distribute the sum as credit lines to commercial banks, which will then give it out as loans to businesses. If the model works or the credit crunch remains strong, a further equity increase of 300 million leva would follow.

Accidentally or electorally, the ruling coalition will have achieved one of its goals, namely giving a good headstart to a state financial institution the creation of which was not universally accepted. The Cabinet's explanation was that this is one of the measures to counter the effects of the global financial crisis, but it is difficult to calculate how such a relatively small sum could have any impact. Still, with access to lending being scarce right now, the idea of a financial injection in the banking system does not sound bad. The question is how the money will be spent, what will the effect be and whether the devil is in the details.

Negotiations
Expectations are that the money would make it to the banks by the end of the year, but the conditions and amounts allocated under credit lines are still being negotiated, including with the Association of Banks in Bulgaria. For now, the only certain things are that the maturity period would be 10 years, with a long grace period. The model would not be any different from the one used by international financial institutions, BDB officials have said.

"Whether all banks will use the credit line is a question of vision," BDB executive director Dimitar Dimitrov said. "We want to set a ceiling on the size of the credit lines, because it would not make sense to work with only two banks. We want wide representation, but we are also clear that that it is impossible for 100 million leva to be distributed among 30 banks."

The money would be used to give loans to small and medium-sized enterprises, which by law are defined as companies with no more than 250 people on payroll and an annual turnover of 97 million leva and/or 84 million leva in assets. According to the plan, some of the loans have to be for investment in new technology and the rest to finance exports.

"The idea is not only for the banks to have access to cheaper finance, but for that to show in the loan terms of the customers," Angel Genkov, who, too, is an executive director of BDB, said. "We will impose a maximum margin that banks would be allowed to charge, but at this point the international markets are unpredictable." Interest rates would be "fairly competitive" and comparable to those charged before the outset of the financial crisis, he said.

The banks that will receive the credit lines will then have the freedom to use their own rules in giving the loans, assessing and managing the risk. They would have to file regular reports with BDB.

Contradictory reactions
Until recently, credit growth in Bulgaria was one billion leva a month, of which more than 100 million leva went to small and medium-sized businesses, bankers say.

Against that backdrop, 100 million leva looks an insignificant sum, which would hardly influence the market and the cost of financing. Bankers believe that lowering the size of the minimum mandatory reserves that lenders have to keep at the Bulgarian National Bank would work better to raise liquidity in the banking system. Nor is it certain whether Bulgarian lenders owned by a foreign banking group would take a credit line, given that the European Central Bank (ECB) recently gave all lenders in the euro area access to unlimited refinancing, meaning that most Bulgarian lenders could seek financing from their parent banks.

Others in the banking system have welcomed the news.

Tsanko Kolovski, executive director at Investbank, said that the initiative was "a good one, because it would give a breath of fresh air to the real sector and it would not suffer from the cautiousness of banks". Even Societe Generale Expressbank, which recently signed a credit line with the European Bank for Reconstruction and Development (EBRD) for five million euro to finance the development of small and medium-sized enterprises, has said that it was interested.

In recent years, many Bulgarian banks have agreed credit lines from EBRD, the European Investment Bank, EU's Phare pre-accession aid programme, German state-owned development bank Kreditanstalt fuer Wiederaufbau (KfW), the United States Agency for International Development (USAID) and the Black Sea Trade and Development Bank, among others. Experience shows, however, that signing of credit lines does not always guarantee that they would be used. Often the utilisation is delayed by conditions set out in the contracts, which do not always reflect the economic realities.

Kapital, issue 45